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Is It Ethical to Break Pension Promises?

Q: My county government is in terrible shape because of soaring spending and payrolls during the boom and plunging revenues in the bust (from lower property and sales taxes). We seem to have promised very generous pensions to county workers—for some, retirement at 55 with a high percentage of their final salary, plus cost-of-living hikes forever. With COLAs, some longtime retirees now receive more per month than they ever earned working.

But apparently, way too little money was set aside to fund present and future pensions—even if the anticipated investment returns had held up, which they didn’t. So now the commissioners are planning to cut benefits for future retirees. County employees say that a promise is a promise and it would be unethical to renege. How do you see this?

SEE ALSO: Knight Kiplinger's Money & Ethics Quiz

This is a dilemma of dueling ethics if ever I saw one. On the one hand, county employees were led to expect a certain level of retirement security. Whether the promises were legally binding on future county commissioners will probably be decided in court, as is now occurring all over the U.S. In any event, county workers made personal decisions based on these expectations, such as how much additional money to save over the years to supplement their pension. This argues for fulfilling their expectations.

On the other hand, it was unethical of past officials to make pension promises that depended on forever-booming revenues and not set aside enough current revenue. (Hadn’t they ever heard of recessions?) In effect, they put an unknown burden on future taxpayers, including young people not even in the workforce yet.

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It’s a tough call, but I believe it is ethically permissible—indeed, imperative—for current officials to find a middle ground between these conflicting obligations, even if it means reducing future benefits. With enough notice, civil servants can adjust their plans (such as their retirement date) accordingly.

Have a money-and-ethics question you'd like me to answer in this column? Write to me at ethics@kiplinger.com.